Multiple claims and inconsistent outcomes

Multiple shareholder claims cause high legal costs and a risk of inconsistent results with regard to the same underlying situation. They may also provide a single shareholder with an opportunity to bring essentially the same case twice as a beneficial owner. These issues are addressed in turn.

a. The interest in judicial economy and the issue of costs

National courts have frequently underlined that the prohibition on shareholder claims for reflective loss serves the societal interest in “judicial economy” by reducing the number of cases needed to address the harm. The Gaubert court underlined this interest:

One rationale behind this prohibition [on shareholder claims for reflective loss] rests on principles of judicial economy. A corporation can protect its shareholder's interest by suing in the corporate name, and if the suit is successful the proceeds will inure to the benefit of the corporation; this increases the value of the individual shares in proportion to the amount of the recovery. Compare this to a situation where all shareholders sue in their individual capacities, which achieves the same resultant recovery, but requires our legal system to process hundreds or thousands of suits, rather than one suit in the name of the corporation.77

Multiple shareholder claims in ISDS substantially increase costs for governments as well as for claimants:

[Because shareholder claims are widely available in ISDS,] capital- importing countries having entered into a significant number of BITs will increasingly run the risk of being respondents in multiple (and often simultaneous) arbitration claims filed by different entities included in the increasingly sophisticated and complex corporate structure of foreign investors. Such multiple claims will clearly result in very high legal costs for respondent States.78

For example, CMS and Total were two unrelated minority shareholders of TGN, an Argentine gas distribution company. Each brought a separate claim. Only partial costs information has been released in either case, but there is no doubt that costs in both multi-year cases have been very substantial for all parties.79 In its 2010 award on liability, the Total tribunal noted that the claimant was seeking an interim costs award in the amount of EUR 10,264,735.62 plus USD 4,368,881.87 for its legal and related costs incurred to that date, as well as USD 431,500 for arbitral costs to that date. Argentina claimed that its interim costs amounted to USD 1,215,222.99.80 The company, TGN, has recently announced that it also intends to sue the government for alleged damages arising out of

77 _{Gaubert, 885 F. 2d at 1291.} 78 _{Valasek, p. 73.}

79 _{The CMS case was filed in 2001. It gave rise to a 2003 decision on jurisdiction, a 2005 decision on the merits}

and a 2007 decision on an application for annulment. The Total case was filed in 2003 and has given rise to a 2006 decision on jurisdiction and a 2010 decision on the merits; a further decision is expected on damages, which may be followed by additional proceedings seeking an annulment.

"pesification"; the degree of overlap with the damages awarded or at issue in the CMS and Total claims is unclear.81

In another example, Egypt reportedly faces multiple ISDS claims from shareholders with regard to alleged treatment of East Mediterranean Gas Company (EMG).82 An alleged 12.5% shareholder of EMG known as Ampal has brought an ICSID case against Egypt. Other shareholders with overlapping interests in EMG, include Ampal's CEO and controlling shareholder, are reportedly pursuing a separate ad-hoc UNCITRAL ISDS arbitration under the Poland-Egypt bilateral investment treaty over the same events.83

Costs for claims for reflective loss may be increased because of the need for high-cost expert evidence to address the problem of how much reflective loss is suffered by the different corporate stakeholders.84

In addition to increased costs for governments, the availability of multiple shareholder claims may allow tactical behaviour by shareholders. The Yukos situation has generated multiple claims against Russia by different shareholders of Yukos in different proceedings. A small Spanish Yukos shareholder claim for $2.6 million in Quasar v. Russia was entirely financed by $14.5 million provided by the majority Yukos shareholder (which is bringing three separate Yukos-related cases against Russia).85 This interested third party financing arrangement was discovered only late in the Quasar proceedings.86 The small Quasar case gave rise to tribunal findings that are expected to be used by the majority shareholder-funder as well as by other Yukos shareholder claimants.87 It appears

81

See TGN demandará a gobierno de Argentina, El Economista (Mexico) (10 October 2012) (TGN announces expected claim against government due to 2002 pesification law and subsequent freezing of tariffs; claim to seek damages incurred since 2006). CMS's damages as a shareholder were apparently calculated based on the life of the TGN concession to 2027. CMS Gas Transmission Company v. Argentina, Award (2005), § 199.

82 _{See Luke Eric Peterson, Battle is joined on second treaty-arbitration front in Israel-Egypt gas fight, as ad-hoc}

arbitral tribunal is chosen, International Arbitration Reporter (6 Feb. 2013).

83 _{See id. ("In the Ampal claim at ICSID, as well as in the ad-hoc claim, ... damages are sought not merely for}

the interruptions in supply suffered as a result of the “terror” attacks, but also for the ultimate termination of the gas venture by the Egyptian counter-parties (whose conduct is attributed by the claimants to the Egyptian state)).

There are additional contract claims and commercial arbitration proceedings involving the company, EMG, and Egyptian SOEs apparently also arising out of the same events. Id.

84

See GAMI v. Mexico, Submission of the United States (non-disputing party) (30 June 2003) (noting that "international tribunals have rejected shareholder claims in part because of the difficulty in determining what relief can fairly be granted in light of potential claims by creditors and other interested parties").

85 _{Quasar de Valores SICAV, S.A. v. Russian Federation, (SCC), Award (2012); Hulley Enterprises Ltd}

((Cyprus) v. Russia; Yukos Universal Limited v. Russia; Veteran Petroleum Limited v. Russia. The

three latter cases are being heard together by a single tribunal.

86 _{See Quasar de Valores SICAV, S.A. v. Russian Federation, (SCC), Award (2012); Luke Eric Peterson, Russia}

held liable for expropriation of Yukos shareholdings in case brought by minority Spanish shareholders (but funded by majority owner), International Arbitration Reporter (26 July 2012) (“with the publication of the final award in the Spanish shareholders' claim, it has been confirmed that the $14.5 million (US) used to pursue the Spanish BIT claim was provided entirely by an interested third-party: the majority Yukos shareholder, Group Menatep Limited”).

87

See id. (“Compensation is modest [in Quasar], but majority shareholders (and funders of this case) may be heartened” [by the tenor of the Quasar decision]).

In addition to the three joined cases brought by majority shareholder of Yukos and the Quasar case, ISDS shareholder claims arising out of the alleged injury to Yukos include a claim by RosInvestCo Ltd, a UK

that a government may take a risk if it seeks to save money on its defence costs in defending a small shareholder claim.88

In contrast to domestic law, the admissibility of shareholder claims for reflective loss in ISDS makes possible a broad range of multiple claims for the same underlying injury to an operating company. Some of these possibilities are illustrated in figures below.

A first type of multiple shareholder claims are brought by unrelated foreign shareholders of the same company. The shareholders are separate entities without any common ownership.

Figure 1. Multiple Claims by Unrelated Shareholders

Other types of multiple claims can be brought by related entities (with common ownership). Three scenarios can be distinguished. In the first, a domestic company (without access to ISDS) claims in the domestic courts and a foreign shareholder brings an ISDS claim.

affiliate of the US hedge fund Elliott Associates. In addition to the shareholder claims, the company brought proceedings against Russia at the ECtHR, which reached different conclusions from the ISDS tribunals on some issues. See OAO Neftanaya Kompaniya Yukos v Russia (Application No. 14902/04), Judgment of 20 September 2011 (European Court of Human Rights); Jarrod Hepburn, Human Rights Court find some breaches by Russia in Yukos case, but diverges from earlier BIT arbitration ruling on other points, International Arbitration Reporter (20 Sept. 2012).

88 _{To the extent the Yukos cases involve direct loss rather than reflective loss for shareholders, the cases would}

not be subject to any principles on reflective loss. See, e.g., Hulley v. Russia, Interim Award on Jurisdiction and Admissibility, §§ 61, 372 (2009) (finding that the claimant’s shares were frozen by the government and the company was prevented from disposing of any assets; finding that claim is an action for direct loss). They are addressed here to illustrate issues raised by multiple shareholder claims.

Shareholder A (BIT-covered foreign company) Shareholder B (BIT-covered foreign company) Other BIT-covered shareholders Non-covered foreign and domestic shareholders Domestic company

Figure 2. Multiple Claims by Related Entities I

Foreign shareholder and a domestic company without access to ISDS

In the second type of multiple claim by related parties, a foreign company and a domestic company with access to ISDS bring separate claims.89

Figure 3. Multiple Claims by Related Entities II

Foreign shareholder and a domestic company with access to ISDS

In a third type of multiple claims by related parties, two different foreign shareholders, at different levels of the corporate chain, both bring ISDS claims.

89 _{Domestic companies can, for example, have access to ISDS pursuant to certain provisions of the ICSID}

Convention. See below section on ICSID art. 25(2)(b). Shareholder A (BIT-covered foreign company) Other BIT-covered shareholders Non-covered foreign and domestic shareholders Domestic company  domestic claim only  no access to ISDS

Government Alleged _harm Creditors

Shareholder A (BIT-covered foreign company) Creditors Domestic company  foreign controlled  access to ISDS Government Other BIT-covered shareholders Non-covered foreign and domestic shareholders Alleged harm

Figure 4. Multiple Claims by Related Entities III

Two different tier foreign shareholders both with access to ISDS

These variations can be combined. For example, multiple claims by unrelated foreign shareholders can be accompanied by a further claim by the company (in ISDS or in the domestic courts).

In the absence of legal barriers to shareholder claims, high case costs for ISDS claims may be the principal barrier to multiple shareholder claims against governments. In terms of the costs effects for governments, this may cut both ways: while these costs will diminish the number of multiple claims, the costs in each case that is brought will be very high. High costs also raise issues about access to justice and equal treatment between foreign investors.

Arbitral case law on shareholder claims does not appear to have reflected significant concern with judicial economy issues raised by allowing multiple shareholder claims for reflective loss in ISDS.As with other policy issues, arbitrators have generally interpreted the treaty definition of investment and arbitral precedent as resolving the issue without the need to consider the consequences (in this case, for respondent States and non-claimant victims of reflective loss such as other shareholders and creditors).90

b. The risk of inconsistent outcomes rises with multiple claims

National courts appear to have focused more on the costs consequences of multiple claims than on the risk of inconsistent outcomes. Because the applicable rules in national law generally block shareholder claims, cases of inconsistent outcomes are very rare in national law.

The risks of incoherent outcomes may be greater in ISDS that it would be if claims for reflective loss were permitted in national law. The ISDS system is decentralised and uncoordinated compared to national courts. In ISDS, each shareholder (or other reflective claimant) is entitled to its own tribunal

90 _{As participants have noted in earlier Roundtable discussions of ISDS, high costs for the parties in ISDS}

constitute revenues for the arbitration bar and create economic incentives, particularly with regard to decisions on jurisdiction. See ISDS Scoping Paper, pp. 47-48. The impact of those incentives, if any, is the subject of differing views. See FOI Roundtable Progress Report on ISDS, p. 16 (section on arbitrator incentives). Because of the corporate law context, the alignment of certain economic incentives for arbitrators and foreign investor interests may differ somewhat from other jurisdictional decisions.

Shareholder A (BIT-covered foreign company) Creditors Other BIT-covered shareholders Non-covered foreign and domestic shareholders Government Alleged harm BIT-covered foreign company Operating company

(in the absence of clauses requiring consolidation, which are rare). It can often file its claim under a different treaty so that different law may apply. Some or all of the proceedings may be confidential. As Valasek notes, the admissibility of shareholder claims “will ... increase the likelihood of inconsistent arbitral decisions.”91

The Lauder/CME cases are a well-known example. Ronald Lauder, a U.S. national, was the ultimate beneficiary of an investment in a Czech operating company (CNTS). The investment was held through an intermediate corporation (CME). Lauder commenced a first ISDS arbitration claim in August 1999. Six months later, CME started a second ISDS proceeding before a different arbitral tribunal under a different BIT. (See Figure 5). The Czech Republic refused to consolidate the proceedings as proposed by the claimants.

Figure 5. Multiple Claims by Related Entities: Lauder/CME Two different-tier foreign shareholders both with access to ISDS

(Reflective loss hypothesis; domestic law claims omitted)

91 _{Valasek, p. 73 et seq.} Intermediate holding company Ronald Lauder Ultimate controlling shareholder CEMEL

US-listed company Creditors

Other BIT-covered shareholders

Non-covered foreign and domestic

shareholders

Government Alleged _harm

Intermediate holding company CME (BIT-covered foreign company) CNTS Czech operating company

This chart is derived from the corporate structure of the claimants in the Lauder and CME claims as available from public sources. It presents a simplified version of the corporate structure. Some aspects, such as the number of intermediate holding companies, have been hypothesised.

Both ISDS claims arose from the same facts and involved essentially the same claims.92 As noted by Susan Franck, however, “one of the few common conclusions the two tribunals made was that Lauder and his Dutch investment vehicle had been the victims of discrimination. Beyond that point, the two tribunals came to diametrically opposed conclusions on issues related to expropriation, fair and equitable treatment, full protection and security, and compliance with minimum obligations under international law”.93

The tribunals also took different views of the facts. The CME damages award was US $269,814,000, roughly equivalent to the annual health budget of the Czech Republic. The Lauder tribunal did not award any damages. In a third case, the primary wrong-doer, Lauder's Czech partner, was held in an ICC arbitration liable to pay CME a “mere” US$20 million.94The inconsistencies over the same issues in Lauder/CME were further highlighted by the “impression of a race to the judgment seat between the two tribunals” with the two decisions being issued within 10 days of one another.95

Even where a second tribunal carefully considers an earlier decision, however, inconsistencies are possible. The two tribunals that heard the two separate claims by TGN shareholders against Argentina reached divergent results, notwithstanding careful consideration of the first decision (CMS) by the second (Total). Contrary to the CMS tribunal, the Total tribunal rejected the claimed breach of the fair and equitable treatment standard during the height of the financial crisis. This appeared to be based on (i) an expressly different interpretive approach to the fair and equitable treatment obligation, and to the nature and relevance of legitimate expectations; (ii) somewhat different wording in the BITs at issue; and (iii) different facts (a later date of purchase of the shares by Total).96 Views may differ as to the relative importance of these factors in explaining the different outcomes for the two shareholders of TGN.

c. A single beneficial owner of shares may be able to bring essentially the same case twice.

In addition to their inconsistent outcomes, the Lauder/CME cases have been sharply criticised because critics consider that the same shareholder was in effect given “two bites at the apple”. The risk of inconsistent outcomes is borne principally by the respondent state, because a single victory is enough for the shareholder to obtain the benefit of an enforceable award for the full amount; a loss in the other case has no impact:

An appeal to basic notions of justice would surely suffice to refute any suggestion that such a state of affairs is acceptable as a matter of principle. A host state cannot be expected to defend a barrage of concurrent or consecutive claims relating to precisely the same prejudice to a single investment. Nor can it be right for a host state to defend consecutive claims in relation to the same investment by different members of the group of claimant companies until an award favourable

92 _{For a detailed analysis of the background and decisions, including the similar provisions in the two}

investment treaties, see Susan D. Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions, 73 Fordham L. Rev. 1521 (2007).

93 _{Id., p. 1563.}

94 _{See James Crawford, Ten Investment Arbitration Awards That Shook the World: Introduction and Overview,}

4 No. 1 Disp. Resol. Int'l 71, 92 (May 2010).

95 _Id.

96 _{See Total v. Argentina, Award on Liability (2010). Both tribunals found Argentina liable for the period after}

to that group is procured. The enduring and disturbing feature of the award in CME v. Czech Republic is that this state of affairs was condoned as an inevitable feature of the investment treaty regime.97

These types of claims are not possible in domestic law under the no reflective loss principle. They would appear to require not only the admissibility of reflective loss claims, but also that each claim is seen as autonomous.

A number of commentators have argued that a more flexible use of the principles of res judicata could address the “two bites at the apple” problem in the context of claims by related entities.98 In the Lauder/CME cases, arguments based on res judicata were rejected by the tribunal and by a Swedish appellate court.99

4. Consistency concerns could be exacerbated if creditors, at risk of injury from shareholder claims for reflective loss in ISDS, also seek to bring reflective loss claims in ISDS

a. Shareholder claims for reflective loss put creditors at risk

It is widely recognised that allowing shareholder claims for reflective loss can injure creditors of the company (unless the defendant is forced to pay the same damages twice).100 As noted above, Lord Millett underlined in Johnson that "protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder" (assuming double recovery is excluded).101 The Gaubert court similarly underlined how the bar on shareholder suits serves to protect the company’s creditors:

Were common shareholders allowed to sue directly and individually for damages to the value of their shares, we would be allowing them to bypass the corporate structure and effectively preference themselves at